VICI Properties (NYSE:VICI) is the biggest casino REIT in the world, owning some iconic assets like the Caesars Palace, and it has been one of the most rewarding REITs ever since it went public in 2017.
Even despite the pandemic and the historic surge in interest rates, it still managed to deliver a 114% total return to its shareholders - which is 4x more than the average of the REIT sector (VNQ):
It was also one of the fastest dividend growers over this time period, growing its dividend by nearly 8% per year on average - again far more than its peers including Realty Income (O), Agree Realty (ADC), W. P. Carey (WPC), and others.
That's truly remarkable given how tough of a time period this was. The pandemic was quite literally the worst possible crisis for a casino landlord, and many have described the recent surge in interest rates as catastrophic for commercial real estate owners.
It makes me wonder: if this couldn't take VICI down, then what will? This is a real fortress of a REIT!
But lately, its market sentiment appears to have soured, even despite its strong fundamental performance. As a result, its share price has dropped by 23% since mid-of-2022 even as the REIT grew its cash flow by 18% since then:
A 23% drop in the share price coupled with an 18% surge in its FFO per share essentially means that its P/FFO has dropped by 41%.
Is this a buying opportunity?
Or should you sell before it drops even further?
I think that it is a great opportunity.
Right now, the company is priced at a historically low valuation multiple of just 12x FFO, and it offers a near 6% dividend yield.
This would seem to suggest that the company is facing some severe headwinds, but this simply isn't the case.
On the contrary, the company is today bigger and better diversified than ever:
Moreover, VICI has now proved its resilience to the market, which warrants a higher multiple. Prior to the pandemic, VICI was discounted because casinos were perceived to be cyclical, and many investors wondered how VICI would fare in a recession. Well... VICI passed that test with flying colors and proved to the market that its assets are truly mission-critical for its tenants. They did not stop paying their rent even in what was the worst possible crisis for them because these assets were absolutely irreplaceable to them. Caesars (CZR) as an example cannot simply move out of the Caesars Palace into another property and expect its business to sustain the same level of profitability.
It is the best proof that these are "mission critical assets", and this proof should reassure the market and warrant a higher valuation multiple:
But what seems to have hurt its market sentiment is that it has guided for its growth to slow down this year.
Last year, VICI grew its FFO per share by a remarkable 11.8%, but guidance for 2024 assumes a slowdown to a "mere" 4% AFFO per share growth rate as the REIT absorbs acquisitions and refinances over $1 billion in maturing debt.
Moreover, the REIT has another $1-2 billion of additional maturities coming its way in each year through 2030:
This will inevitably slow down its growth if interest rates remain at current levels, and it warrants a somewhat lower valuation.
I agree with that.
But the great thing about this lower valuation is that VICI does not need to grow as fast anymore and still deliver strong total returns to its shareholders.
When you trade at a 6% dividend yield, all it takes is 4% of annual growth to reach double-digit total returns, and I think that VICI can keep delivering ~4% of annual growth, even despite the headwind of higher interest rates.
That's because:
- Its leases enjoy CPI-based rent adjustments, which should result in faster rent growth during times of higher inflation.
- The REIT retains 35% of its cash flow to reinvest in additional properties.
- It has a pipeline of acquisition opportunities, including call options on additional casinos, at an ~8% cap rate.
- It just recently began to expand abroad with its first casino acquisitions in Canada, and the long-term growth opportunity is significant.
- The leverage of the REIT is relatively low, all of it has a fixed interest rates, and its maturities are well-staggered.
Moreover, it is widely expected that interest rates will return to lower levels sometime over the next year. According to FedWatch, there is a 99% chance of at least one cut over the next year, and it is expected that interest rates will be ~75-100 basis points lower by the end of the Summer 2025.
Therefore, the headwind of higher interest rates should not last for much longer. It is also important to keep in mind that VICI's credit profile has improved over the years, and therefore, all else held equal, it should be getting lower interest rates. That provides an additional margin of safety in case interest rates don't drop by this much.
So the base case scenario is that VICI will keep growing at a low-to-mid single growth rate for the next few years and that its growth will accelerate as interest rates return to lower levels.
That's all that's needed given how low its valuation has become, and I really like the risk-to-reward given that you get to buy mission-critical trophy casinos at a historically low valuation, which should result in ~10% annual total returns going forward if rates remain high, but your returns could expand closer to ~15% annual if rates drop and this leads to some multiple expansion. That's quite a bit more than what I would expect from a net lease REIT like Realty Income (O).
This likely explains why one of the most respected REIT investment firms, Land & Building, recently initiated a position in VICI Properties and has been buying more shares according to its latest 13F filing.
It is today the cheapest REIT of this scale that owns trophy assets and is included in the S&P 500 (SPY).
Closing Note
There are better and worse times to invest in REITs.
I think that today is one of the best times in years because most REITs are down significantly and VICI is a good example of that.
The key is to be selective and to invest in REITs that are able to keep on growing even despite the headwind of higher interest rates.
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